Archive for May, 2013

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Silk Road conference focus on Kazahkstan

Thursday 30 May, 2013

Harry Lepinske & the Central Asian Productivity Center sponsored another Silk Road conference & Harry asked me to fill in as a moderator of a panel discussion on Kazahkstan (KZ), so the focus of this post is on that subject.  Dauren Kabiyev, the chief economist @ the embassy of KZ, provided an overview of the country.  GDP/per capita has increased by a factor of 16 to $12,000/year.  Foreign trade has increased to $120B/year.  It’s top 5 export products are oil, gas, minerals, agriculture, & metals.  It’s foreign reserves consist of $90B in gold & foreign currencies gained in its national oil fund.  KZ moved up to #49 in the “Doing Business” rankings & #68 in the Index of economic freedom.  KZ has the world’s 9th largest pool of oil & gas, & is the largest landlocked country in the world.  It is diversifying to increase its growth of renewables, which is attracting foreign investment.

Nick Pribus, a business consultant from Chicago, brought Foodmaster to KZ.  He 1st went to Moscow in 1992, & then KZ in 1993 when he worked in real estate.  His model then was:  buy real estate; sell real estate; repeat.  Then in 2008 he moved into the 5 stages of grief:

  1. denial that the crisis of 2008 didn’t exist
  2. anger through 2009
  3. bargaining in 2010 @ the expense of everything else
  4. depression in 2011
  5. & finally, the comeback with undiscovered opportunities in 2012.

His contention is KZ offers the best opportunities because of its uniqueness & it’s much easier to work there because of its people, who are open, smart, & unlike many others in the region, look for win/win situations.  Foreign investors don’t understand KZ-they don’t want 200 page legal documents:  they want to resolve problems over dinner with a good relationship.  They are not politicians for sale;  they are pragmatic & straightforward.  KZ is #2 in the world behind Australia based on arable land & #3 in oil & gas on a per capita basis.  Beef from KZ is in much the same position as was sea bass from Chile years ago.

Attorney Alex Nisengolts from Chicago talked about “Opening a business in KZ.” Doing business in Kazakhstan (final) – Alex Nisengolts 17 May 2013 Early in his law career a mentor suggested he focus on KZ & since he met his wife there in 1994, he has built his career & family there since then.  KZ has changed dramatically in the past few years with strong GDP growth of 5-7%.  The middle class has grown by a factor of 8 in purchasing power parity terms.  Poverty has been reduced from 46% of the population to 5% resulting in many new consumers entering the market.  Investors have 3 options:

  1. open a representative office
  2. open a branch
  3. open an LLC/joint stock company

To set-up a business, you need the appropriate documents & a license.  The currency is convertible @ the rate of 151 Tenge/US$.  Big transactions must be cleared by the national bank.  Transfer pricing must be done @ arm’s length.  Labor is employee friendly, as hiring is not @ will.  Work permits for ex-pats are limited to 30% of management & 10% of professional & skilled workers.  Taxes are low with a corporate tax rate of 20% & personal income tax rate of 10%.  Dividends & capital gains can be tax exempt.  Tax residency rules are similar to those in the U.S.  You must negotiate with the tax authorities on issues of permanent establishment & the location of management.  Legislation changes frequently, so you must do robust tax & legal planning.  Do your due diligence, comply with the law, & avoid tax havens.

Q&A

  • KZ is working on joining the WTO ASAP & the US supports this.  Politicians & administrators are accessible, so get good local partners.  Don’t just show up to sell-build relationships.
  • Metals, & oil & gas constitute 85% of KZ’s natural resources, but they are committed to reducing this proportion to 60% in the next 5-6 years.
  • Their oil fund was founded in 2000 & modeled after Norway’s program to the tune of $15B from a banking account from their oil surplus.  It makes annual transfers to social programs & invests in government bonds, hedge funds, & PE funds.
  • The best US travel connections to KZ  are via Amsterdam & English is acceptable as the language of business in cosmopolitan Almaty.
  • Opportunities are in retail & industry, as KZ needs equipment.  Shopping malls are attractive, but the economy is not as scalable as in China.  To take advantage of all the arable land, don’t buy land, rather invest in viable businesses-there are many inputs & outputs which still aren’t there.  Special Export Zones & rapid depreciation are other opportunities.
  • The central Asian customs union of which KZ is a member provides access to 170M consumers. KZ is getting financial help from the US & the World Bank.
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Google CEO on global technology

Wednesday 22 May, 2013

Eric Schmidt, former Google CEO, together with Jared Cohen, director of Google Ideas, has written a book, The New Digital Age, Reshaping the future of People, Nations, & Business, about how technology is affecting global business. He was in Chicago to talk with the Chicago Council on Global Affairs about it.

He started investigating the role of technology in Iraq around Thanksgiving & found they used their mobile devices to keep up to date on how their families are doing amidst all the chaos as cameras on cell towers watch IED’s go in the ground. The technology has empowered citizens for the greater good. 5B people will be accessing the internet for the 1st time in the next 5-10 years, many of them via mobile devices. These people will be bearing witness to great changes in societies. This is epitomized by the battle between governments which want to be big brother to their citizens & citizens that use the internet to report on what governments are doing. Citizens are pressing governments to change. Mubarek turned off the internet in Egypt for 4 1/2 days but was ultimately overthrown. In Afghanistan, it was only when the Taliban took the Afghan’s phones that they fought back to retrieve them. Fisherman in coastal Asia use SMS messages to keep their fish fresh in the water. Schoolgirls use Google maps to avoid bandits on the way to school. North Korea is the worst example of lack of a technology strategy. They have crossing guards on large boulevards with no cars as well as no conception of YouTube or even the internet.

Talk of technology policy results in silo’d conversations. China & the US are ostensibly allies in the physical world, while virtual enemies in the online world. Google Earth in Iran happens to depict the Middle East with no Israel.

The 1st shots of war will be shot in cyberspace in the future. There will be more munitions & noise, but fewer deaths.

Terrorists have leveraged technology in the past, but access to the internet also gives extremists reasons to doubt their leaders too. If we had the internet 20 years ago, perhaps we could have avoided the genocides in Rwanda.

Living life online will have implications even before some children are born.  Women in Saudi Arabia have been endangered by information that has been posted online.  A girl was killed as an honor killing because of what she submitted in an online chat session.

China is the world’s biggest computer hacker-we should assume this is a permanent state.  It’s important to realize that most technology infrastructure is not yet built:  the question becomes “Will that look more like the US or China?”  Thankfully American values are embedded in the internet.

In Myanmar/Burma, mobile communications is fueling a democracy, while the internet doesn’t work there.  It felt like East Germany after the wall fell, but there are no incentives for those in power to give up power.  They’re considering a bill to limit press freedom.  The constitution guarantees 25% of the seats in government to the military, which has little tolerance for the 35% of the population that are minorities.

Cell phones contributing to the media leads to more citizen journalism.  The traditional media will continue its role of verification & analysis, & perhaps help figure out which Twitter feeds to trust (& get over America’s obsession with celebrities).

Q&A

Personal privacy is still protected on the internet because we can’t lose that trust, no human sees private data, & there are incentives for companies to protect data.

Technology can lead to reductions in unemployment with improvements in education.  The next 5B internet users will be using smart phones to access information which should lead to improvements in their critical thinking.

Google has not become too big & powerful because it was founded on strong principles & that culture will not change.

Unfortunately there is no systematic way to deal with author’s rights.  Books published before 1920 are OK.  50% of the sales of their book are digital & 50% are in hardcopy.

Schmidt defended former Google employee/present Yahoo President Marisa Miller’s edict to ban working from home.  Virtual halogen images of people simply do not get the same results or output as when people work physically together.

Teachers are actually becoming more important along with the digitization of education rather than less, so the human element is not being lost in digitization.  Students are learning to make fact-based arguments rather than emotionally-based ones.  In the 30 countries that they visited, they saw a number of educational disasters, but we need to focus on education to compete with Asians.

Digital architecture & infrastructure is changing as data moves to the cloud & access is enabled through handhelds & tablets.